Int Entrep Manag J (2012) 8:449–465

DOI 10.1007/s11365-012-0234-3

Business model innovation in entrepreneurship

Silvana Trimi & Jasmina Berbegal-Mirabent

Published online: 8 September 2012

# Springer Science+Business Media, LLC 2012

Abstract The goal of this paper is to advance the understanding of emerging

developments in business model design within the field of entrepreneurship. It is
widely known that during the start-up process, entrepreneurs need to set up the
boundaries of the business and define the product/service to offer. This is a very
complex task, especially for new technology-based companies which usually require
large investments and have a limited time span (avoiding product obsolescence) to
turn the idea into a full-time venture. Although business model design within the
entrepreneurship field is a recent topic, it is gaining a growing attention in the
literature. The usefulness and predictable power of business models are expected to
help entrepreneurs make more informed decisions, thus increasing the chances of
success. This article first tackles the specific problems faced by new technology-
based firms, linking their needs with the advantages of having a flexible and well-
designed business model. Second, different innovative practices aimed at improving
business model design are discussed. The paper ends with some recommendations,
stressing the need for future empirical work.

Keywords Business model . Entrepreneurship . New technology-based firms .

Business innovation . Customer development model . Lean start-up

S. Trimi
Management Department, University of Nebraska – Lincoln, CBA 276, P.O. Box 880491, Lincoln,
NE 68588-0491, USA
e-mail: strimi2@unl.edu

J. Berbegal-Mirabent (*)
Department of Management, Universitat Politècnica de Catalunya – BarcelonaTech, FIB, C. Jordi
Girona, 1-3, Building C5. Office 012, 08034 Barcelona, Spain
e-mail: jasmina.berbegal@upc.edu
450 Int Entrep Manag J (2012) 8:449–465

Introduction

It is acknowledged that the process of starting up a new venture is a very complex and
demanding task, especially in the initial stages, where efforts are mainly focused on
building the product that can be commercialised, and where the organizational and
financial architecture of the firm has to be developed. Firms operating in the
technology-intensive sector may face even some additional constraints such as large
investments required to develop the product, or very short product life cycle, and
emergence of many copycat competitors. This suggests that technology-based entre-
preneurs (those that turn inventions and high-tech concepts into viable businesses)
function in an uncertain and evolving environment. In this dynamic setting, innova-
tion speed, product development, customers’ behaviours, competition threat, govern-
mental regulations, suppliers, investors, as well as many other environmental factors,
have a considerable impact on the organization (Goktan and Miles 2011; Mulders and
van den Broek 2012).
All of these essential features regarding the product, operations, and the structure
of the new venture are embedded in the business model. According to Teece (2010
p.20), business models reflect “management’s hypothesis about what customers want,
how they want it and what they will pay, and how an enterprise can organize to best
meet customer needs, and get paid well for doing so”. Put differently, a business
model describes how things have to be done to deliver value to customers, where to
put the money for the sustainability of the firm, and how to manage the organization.
These strategic choices on how to exploit knowledge and manage resources in pursuit
of competitive advantage (Andersén 2011; Cegarra-Navarro et al. 2011; Chilton and
Bloodgood 2010; Lin et al. 2010) outline the business logic required to earn a profit,
and define the landscape in which the company will operate (Casadesús-Masanell and
Ricart 2010; Garnsey et al. 2008).
Although business models have been positioned in the agendas of many academ-
ics, entrepreneurs, and managers in general, it is quite surprising that literature has a
general paucity of serious research on this topic. Perhaps, the rationale behind this
absence of specific literature lies in the lack of consensus on the theoretical grounding
behind the definition of what a business model is (Teece 2010; Zott et al. 2011). There
exists no generally accepted definition of the term “business model” and the diversity
of the terminology also may have contributed to spark this debate (Morris et al.
2005). For instance, the terms “business model”, “business strategy” or even “eco-
nomic model” are often used interchangeably.
The strategy of a firm outlines the way the organisation will pursue its goals given
the threats and opportunities in the environment and the constraints of its resources
and capabilities (Nandakumar et al. 2010). Business models are much broader than
strategy in that they establish how firms can potentially create value (Morris et al.
2005). Previous research suggests that business models represent the sources of new
value creation and potential competitive advantage (Afuah 2004; Chesbrough 2010;
Chesbrough and Rosenbloom 2002; Mahadevan 2000; Voelpel et al. 2005), deliver
and capture the mechanisms employed (Teece 2010), and act as drivers of firm
performance (Rajgopal et al. 2003). As such, positioned in the intersection of
strategic management and entrepreneurship theory (Ordanini et al. 2004; Teece
2010) business models hold promise as unifying units of analysis for entrepreneurial
Int Entrep Manag J (2012) 8:449–465 451

ventures (Morris et al. 2005). Yet, an incipient empirical research appears to germi-
nate (Brettel et al. 2012; Zott and Amit 2007).
According to Zott and Amit (2010) business model design stands as a key issue for
any individual willing to create a new business. Business models integrate basic
insights of innovation, business processes and routines (Cavalcante et al. 2011). The
purpose of this paper is to highlight the significance of business model design as a
key task for the entrepreneur in the process of starting a technology based venture.
We therefore explore the interrelationships among business model design, product
development, customers’ requirements, and innovation management.
This paper is structured as follows. The second section articulates problems that
technology-based firms face. The next section reviews the main theoretical founda-
tions behind the emergence of business model research in the field of entrepreneur-
ship. In the following section, we discuss the implications of business models as a
source of business innovation, renewal, and continuous improvement. We then
provide a systematic overview of the emerging trends in business model design that
have emerged in recent years. Some of the main practices discussed include: the
introduction of open business models, aiming at capturing innovative strategies that
improve the performance of the firm; the use of a business model canvas to better
plan and identify the sources of value creation and the links with business strategy;
the customer development model to simultaneously explore market and product
developments; and the adoption of the lean philosophy to better satisfy customers’
needs and use the variety of scarce resources in an effective and efficient way. Finally,
in the last section, conclusions and implications are presented.

Developing a technology-based venture

New venture creation involves many domains (Gartner 1985). According to Timmons
(1977), three main elements underline the entrepreneurial process of starting a new
venture: the identification or recognition of an opportunity, the configuration of the
entrepreneurial team, and the selection of the resources to efficiently exploit the idea.
The strategic management literature has emphasised the role of intellectual capital,
organisational learning and social networks as determinants of business competitive-
ness (Fuentes Fuentes et al. 2010; Iebra Aizpurúa et al. 2011; Hormiga et al. 2011).
Hence, the combination of a good idea, a skilled entrepreneurial team and a knowl-
edge sharing culture, results in a successful start-up if resources are effectively
managed. Developing a new venture involves amassing a broad array of resources
and commitments (Stinchcombe 1965).
Because of the ever shortening shelf life of opportunities, entrepreneurs have to be
constantly in vigil of any innovation that could be introduced into the marketplace,
even before there exists demand. Entrepreneurs should see opportunities in situations
where others tend to see risks (Reed and Storrud-Barnes 2010; Sarasvathy et al.
1998).
In technology-based firms, technological opportunities are ideas that are created by
new advances in a technology (Shane 2003). However, such ideas are usually
extremely volatile and fluid, with a very short life cycle, requiring constant updating.
This means that entrepreneurs should be innate risk takers, as they are expected to
452 Int Entrep Manag J (2012) 8:449–465

allocate resources based on market demands or intuitions, as well as decision makers

as they have to fix a price in a market where demand is still unknown.
Built upon the above definition, technology-based start-ups can be understood as
new ventures where know-how and advanced technological discoveries are capital-
ised and exploited through new products and services (Klofsten 1994). Accordingly,
their chances for success depend mainly on rapid and effective management of
knowledge-intensive assets and development and exploitation of the technology
(Nonaka et al. 2000).
As new technologies are characterised by their volatile and unpredictable nature,
the process of developing a technology-based firm entails an extraordinary level of
uncertainty (Aldrich and Fiol 1994), being much riskier than the non-technology-
entrepreneurship process. Moreover, these companies tend to operate in a very
dynamic and turbulent environment, which is true with majority of innovative
opportunities of technology-focused ventures. Thus, it is clear that choosing the right
timing and the appropriate strategy for commercializing a technological opportunity
is of vital importance.
It is in this particular context where business model design has a prominent role in
the entrepreneurship literature. Following Castrogiovanni (1991), during the start-up
process, entrepreneurs need to establish the boundaries of the business and set up the
organizational structure. As the entrepreneurial process is a mechanism for continu-
ous and rapid innovation, early-stage enterprises require business model experimen-
tation to rapidly test the market and validate or reject the business opportunity.
According to Amit and Zott (2001), the usefulness of business models in these initial
stages stems from their explanatory power in regard to the value creation potential of
the new venture (Chesbrough and Rosenbloom 2002), the plans to make money in the
long run (Afuah and Tucci 2001), and how the venture will sustain itself over time
(Rappa 2001).

Business models in entrepreneurship literature

Business models can lead to more informed decisions in the context and management
of new ventures (Harms et al. 2007). Although previous studies investigated business
models and the process of starting up a new venture separately, the combination of
these two streams of research is a recent topic in the entrepreneurship research field.
In order to ascertain the growing importance of this topic in the scientific com-
munity in recent years, we conducted searches in two of the most commonly used
databases: Scopus and ISI Web of Knowledge. In both cases we searched for papers
that simultaneously include the keywords “business model” and “entrepreneurship”
in their abstracts. Our search identified 132 papers included in the Scopus and 65 in
the ISI Web of Knowledge. Figure 1 shows how papers are distributed over time.
From this figure, it is evident that the research interest in business models in
entrepreneurship began around 1998, showing two peaks in 2005 and 2010 in terms
of the number of contributions.
Due to the lack of a consistent framework (George and Bock 2011), prior research
on business models with an entrepreneurial lens has shown in fragmented research
questions and findings. Some scholars have focused their attention on how business
Int Entrep Manag J (2012) 8:449–465 453

Fig. 1 Distribution of papers indexed in Scopus and ISI Web of Knowledge databases simultaneously
addressing the subjects of “business models” and “entrepreneurship”

models should be formalised (Morris et al. 2005; Tracey and Jarvis 2007), while
others conceived business models as a tool that represents entrepreneurial opportu-
nities (Franke et al. 2008; Markides 2008). Perhaps the approach that has generated
the greatest interest among academics is the one that considers the relationship
between business model design and firm performance (Zott and Amit 2007, 2008),
although some authors suggest that business model evolution is inherently uncertain
(Heirman and Clarysse 2004). Despite the diversity of approaches, we can observe a
common trait. Research contributions tend to address “what business models do”
rather than questioning “what business models are” as in the strategic organizational
literature (Doganova and Eyquem-Renault 2009).
Since the scope of this paper is to better understand the potential effect of
appropriate business model design on firm performance, we focus on those articles
that discussed or tested this relationship. Several quantitative analyses have failed in
finding convergent results concerning the relationships between the efficiency of
business model planning and profitability or survival of the firm (Delmar and Shane
2003; Locke and Latham 2002). In a couple of recent works, however, this relation-
ship was proven to be significant (Zott and Amit 2007, 2008). The results of these
studies confirmed that the business model, used as an independent variable, was
linked to firm performance. Thus, following this line of thought business models can
be conceived as a key organizational design tool that may help predict business
success.
As previously pointed out, the process of starting up a venture is an arduous and
complex task, where many variables have to be considered. It is something that goes
well beyond the own motivation of an individual to create a new venture. It is an
adventure that depends on the transactional links with external stakeholders: custom-
ers, suppliers and partners. This means that a start-up is a human institution designed
to deliver new value in the form of a product or service under conditions of extreme
uncertainty (Ries 2010). Resulting from this fuzzy environment, many start-ups fail,
and a large number of those that survive end up being acquired by larger companies.
However, according to Ries (2010), most of these failures could have been avoided if
entrepreneurs would have put more emphasis on customer feedback. This requires
sound knowledge about the customers and their behaviour.
Centring our attention on the demand side, we observe that in the real world,
customers want fast but accurate solutions to their perceived needs (Teece 2010). As
454 Int Entrep Manag J (2012) 8:449–465

these demands in the high-tech sector should be provided rapidly in view of the high
rate of obsolescence of technologies or disruptive technology of competitors
(Christensen 1997), finding an appropriate response in a short period of time is
essential. This is especially the case when the customer does want not only improve-
ments in the existing products or services but also requires entrepreneurs to provide
innovative products that do not yet exist. This implies that entrepreneurs have to
figure out what customers want in an uncertain environment, and build a sustainable
value chain to address these demands (Lee et al. 2012).
According to Teece (2010), the ideal business model rarely appears in the early
stage of emerging businesses. Going one step further in this direction, Shirky (2008)
argues that those new ventures that are more likely to succeed are those that do not
have a perfect business model template but a flexible one that allows the entrepreneur
to introduce change and readjustments. Clearly, designing a new business model
requires intuition, creativity, and a deep understanding of user needs (Teece 2010).
Similarly, the work of Brettel et al. (2012) demonstrates that entrepreneurs should
explicitly focus on the relationship with their key customers when designing business
models of their ventures. As new start-ups tend to have less routine in processing their
transactions, they should design more than just one business model to handle their
competitors.
According to Andries and Debackere (2007), business models should be adjusted
in parallel to the firm’s life cycle evolution. In this sense, business models are
opportunity facilitators for entrepreneurs, representing the cognitive link between
the business appraisal of the opportunity and its exploitation (Fiet and Patel 2008).
Hence, business models reflect the architecture of value creation and delivery,
specifying the instruments that will be used to meet customers’ needs.
Built upon these arguments, business models can be defined as “stories that
explain how enterprises work” (Magretta 2002 p. 97). Consequently, firm perfor-
mance can be operationalized as a function of specific business model characteristics
(Zott and Amit 2007), symbolising the fit with the strategy (Zott and Amit 2008).
Business models have also been studied from an economic perspective. Based on
the work of George and Bock (2011), business models represent a core building block
of the entrepreneurial enactment process. In this framing, business models become an
extremely useful instrument for finding partners and investors, as they contain all the
information related to how the firm is planning to create value that can generate the
revenues that will guarantee sustainability survival of the firm (Doganova and
Eyquem-Renault 2009).

Business models as a source of innovation and continuous improvement

While innovation is usually focused on products or services, it is now increasingly on

developing business models that leverage the firm’s unique core competence
(Anthony 2012). When starting up a business, firms may try multiple business
models at the same time (Brown and Gioia 2002).
Today, there is a general consensus that business models, as a source of innovation,
are important vehicles for business transformation and renewal (Zott et al. 2011).
They may represent a component of innovation commercialisation that is managed
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separately, but in accordance with the value innovation process (George and Bock
2011). A considerable number of scholars have studied business models from this
perspective, where innovation is a key success factor for firm sustainability perfor-
mance (Chesbrough 2010; Demil and Lecocq 2010; Johnson et al. 2008; Sosna et al.
2010).
Innovation within business models can be manifested in three different ways. On
the one hand, business models can themselves represent a form of innovation
(Mitchell and Coles 2003), by introducing new methodologies or modifying the
internal operations of the firm improved efficiency, but without altering the essence
of the product/service delivered. On the other hand, technological breakthrough may
enable the firm to become the first mover in the market. This is the technology-push
approach that typically takes place in large companies. To remain at the cutting edge
of innovation and maintain leadership in the market, firms develop initiatives that
may include the offering of secondary products or adapting the existing products to
other contexts. This so-called disruptive innovation, may encompass little changes in
the business model, and can be the key to the renewal of the business (Christensen
1997). There is also the demand-pull approach, where business models should be
reformulated to fulfil new customer needs and business environments (Teece 2010).
Some scholars contend that to profit from innovation, entrepreneurs need to excel
not only at product innovation but also at business model design (Teece 2010). This
suggests that from their original design, business models should be flexible enough to
allow the entrepreneur to anticipate problems, rapidly correct potential deviations
from the targeted objectives, and project the natural evolution of technology and
society (Delmar and Shane 2003). Thus, business models take shape through a
process of experimentation (McGrath 2010). This reinforces the idea that a company
does not necessarily confine itself to one business model but can have several
simultaneously (Baden-Fuller and Morgan 2010). All these considerations give rise
to the argument that defining, adjusting and/or improving a business model is a
complex art that needs further research efforts. Particularly, in recent years new trends
in the design process have emerged.

Emerging business model practices

The search for a flexible and appropriate business model is an imperative for any
start-up. Following Blank’s (2006) thesis, this search can be divided into two main
stages. First is the business model design step, following trial-error dynamics. That is,
testing several hypotheses regarding the product/service being offered or operational
functions of the firm. This iterative process is expected to help set the boundaries of
the organizational structure. Once a robust business model is formulated, the second
phase consists of its application. It is here where the business model should prove its
scalable and reproducible character. Effective management is then needed to prevent
the organization from becoming too big to fail (Fleck 2010). By using the concept of
scalability, Blank (2006) suggests that the business model driving the start-up should
be at the largest scope which demands the least amount of change in its structure.
That is, the business models should accommodate small but powerful modifications
that can make significant contribution to firm performance.
456 Int Entrep Manag J (2012) 8:449–465

The following practices incorporate the philosophy of trial-error in testing the

appropriateness of a business model. Although they have different foundations, they
are all highly related.

Open Business Models

Firms need to innovate in response to changing customer demands and life styles.
Moreover, innovation is recognized to play a central role in creating value and
sustaining competitive advantage of the firm (Huarng and Yu 2011; Naranjo-
Valencia et al. 2011; Rowley et al. 2011). Nevertheless, sustainable and efficient
innovation requires a totally new approach.
Instead of being a process far removed from the market, innovation needs to be
more open and closer to consumers. Open Business Models take their origin from the
notion of Open Innovation introduced by Chesbrough (2003). Based on the principle
that if a company stays isolated from outside entrepreneurs, it will not be exposed to
and exploit the best ideas and opportunities. The best way to generate new ideas that
may lead to innovation entails expanding the firm’s boundaries. The Open Innovation
process involves firms opening themselves to the market, looking for new and fresh
ideas from external sources. The underlying rationale behind the concept of Open
Innovation is that “no company is smart enough to know what to do with every new
opportunity it finds, and no company has enough resources to pursue all the
opportunities it might execute” (Wolpert 2002 p. 80).
From an entrepreneurial point of view, Open Innovation makes its entry in business
model design as a new way to capture additional new ideas that may lead to improving the
performance of the business. According to Gambardella and McGahan (2010), Open
Business Models can encourage additional business model innovations in comple-
mentary markets as a result of the reshaping of downstream activities and capabilities.
The adoption of Open Innovation in business models calls for open designs, meaning
that business models should be conceived in such a way that allow sharing or licensing
of new technologies (Chesbrough 2007, 2010). Likewise, the business model itself can
become a valuable intellectual property (Rappa 2001; Rivette and Kline 2000). The
concept of Open Innovation in the entrepreneurship literature is similar to the one of
collaborative entrepreneurship, which is “the creation of something of economic
value based on new jointly generated ideas that emerge from the sharing of infor-
mation and knowledge” (Miles et al. 2006 p. 2).

The Business Model Generation Canvas

To support the creation of highly complex ventures that deal with the fragile and
volatile technologies, new procedures for creating and testing business models have
emerged. One of these developments is the Business Model Generation Canvas,
proposed by Österwalder and Pigneur (2010) and Österwalder et al. (2005), a
conceptual instrument that helps make right decisions at the right time for business
model development. In a simplified scheme, it contains the objects, concepts and their
relationships, expressing the logic underlying the business. This way, it is possible to
assess, how the business is conceived with respect to the added value, the customer
relationships, the creation process and the financial aspects.
Int Entrep Manag J (2012) 8:449–465 457

The business model generation canvas is structured in nine building blocks: 1)

customer segments, 2) value proposition, 3) channels, 4) customer relationships, 5)
revenue streams, 6) key resources, 7) key activities, 8) key partnerships, and 9) cost
structure. Each block contains a set of questions to validate the model and corroborate
its internal strength.
To facilitate the understanding and analysis of all the pillars of a business, the nine
blocks suggested by Österwalder and Pigneur (2010) can be grouped by the area of
ontology, using a similar criterion used in the Balanced Scorecard (Kaplan and
Norton 1992). Four main areas are envisioned: product, customer, infrastructure
and finance. The area of the product (block 2) describes the value proposition of
the business, that is, the products and services delivered to the market. Blocks 1, 3
and 4 are related to customer engagement, defining the targeted audience, the
demands, how customers perceive the value delivered, and which type of relationship
the company is maintaining with each segment of clients. The infrastructure man-
agement area (blocks 6 to 8) refers to the functions of logistics and production, and
articulates the relationships between key partners (e.g., employees, suppliers or
partners) and the company. Finally, information regarding the sustainability of the
company, cost structure, and how the company is going to earn revenues (blocks 5
and 9) can be considered under the financial area.
According to Hulme (2011a), the use of canvas is essential for the learning cycle of
a start-up. It is expected to help entrepreneurs in four ways. First, it involves
entrepreneurs undertaking an exercise of constant reflection, developing the business
model using a graphical tool where all the elements are related to each other,
providing cohesion to the overall business model. Second, it allows entrepreneurs,
customers, employees, executives, and even competitors to understand how the
business articulates its different components. Therefore, by using this format, the
canvas facilitates communication with the different stakeholders, becoming the start-
ing point of creative discussion about new business opportunities, how to align
activities with the mission and vision of the firm, and facilitates the identification
of risks and failures. Third, it forces entrepreneurs to simultaneously consider each of
the elements of the business individually but also as a whole. This is extremely
important as entrepreneurs tend to concentrate on specific parts of the business,
ignoring other key components. Fourth, the use of a graphical tool contributes to
increase business creativity and innovation. The canvas incorporates the design
thinking methodology, being easier to bring stakeholders to the discussion and
brainstorming sessions, which encourages creative developments based on the needs
and desires of customers.
The usefulness of the use of canvas and its popularity among entrepreneurs have
led to new improvements of the methodology. Perhaps the variation that has the
generated greatest interest is the Business Model Framework (BMF) developed by
Hulme (2011b), which consists of two additional complementary blocks that consider
the planning and assessment of growth and competitive advantage of the firm.

Customer Development Model

Among innovation determinants, market orientation has a close relationship with firm
success (Zhang and Duan 2010). Nevertheless, many start-ups invest a great deal of
458 Int Entrep Manag J (2012) 8:449–465

time and efforts in developing and perfecting the product they are going to offer
without ever showing it, even in a rudimentary form to prospective customers until it
is completely finished. This is the traditional way of making a product: a linear
progression from an idea to product development, followed by several internal tests
before its launch to the general audience. Nevertheless, this logic presents some
drawbacks when it comes to introducing the product to new markets (Blank 2006).
First, this procedure does not guarantee customer acceptance as it focuses on execu-
tion instead of discovery and learning, a very risky attitude in entering new markets.
In addition, it does not integrate marketing, production, sales, and business develop-
ment, meaning that the resulting product may generate to unrealistic expectations,
biased by the overenthusiastic mind-set of entrepreneurs who fail to see the big
picture. Based on these arguments, it follows that one of the main reasons for failure
among start-ups is their lack of a process for discovering their markets, identifying
their customers, and validating their assumptions from the very initial stages.
According to Blank (2006), the Customer Development process helps overcome
the abovementioned flaws. Similar to the new product development process
(Cantarello et al. 2011; Yang and Li 2011) the Customer Development model is a
four step iterative process which includes customer discovery, customer validation,
customer creation, learning and company building. By using this approach, it is
possible to simultaneously explore market and product developments. Figure 2
schematises this process, comparing the different stages with those of the Product
Development process. As shown in Fig. 2, each of the stages meshes and supports
seamlessly the on-going product development. Thus, the Customer Development
model is not a replacement for the Product Development model, but a necessary
complement.
“Customer discovery” is the first step, which focuses on understanding customer
problems and needs, and helps decide whether there is a real market for the product/
service. Thus, this step involves discovering if the core of the business model makes
sense. The “Customer validation” step tries to build a replicable sales roadmap.
Accordingly, a group of early customers with a repeatable sales process corroborates

Fig. 2 Product and customer development processes

Int Entrep Manag J (2012) 8:449–465 459

the business model, verifying the existence of customers, the perceived value of the
product, and the appropriateness of pricing and channel strategies. This stage is a key
checkpoint in understanding whether the firm has a product that customers want to
buy and a roadmap of how to sell it (Blank 2006). Thus, as shown in Fig. 2, there is
an additional iterative loop going back to customer discovery. The third step consists
of “customer creation”, that is to create and derive end user demand, based on the
success the company has achieved in early sales. This stage may vary from firm to
firm, as it is highly dependent on the type of market entry. Finally, “company
building” constitutes the last step of this model. It encompasses the start-up evolution
from informal learning and discovery oriented customer development teams to formal
departments capable of exploiting the company’s early market success.
Notice that one important implication of this process is that each step is repre-
sented as a circular track with recursive arrows, stressing the iterative character of the
process. By doing this, the model ensures the firm has reached enough success to
carry on to the next stage. Thus, it assumes that going backwards is a natural and
valuable part of the learning process that improves the robustness of the business
model. One of the main consequences of this iterative process is that it keeps the start-
up at a low cash burn rate until the company has verified and approved its business
model by finding a sufficient number of customers (Blank 2006). This suggests that
start-ups cycle through the first two stages (customer discovery and customer vali-
dation) several times in their search for the value proposition that can be later
translated into sales. This means that firms do not constitute their non-product
development teams (i.e., sales, marketing, etc.) until they have a real proof that the
business is a viable entity. Once this evidence is obtained, the execution steps follow
(customer creation and company building), capitalising the opportunity identified.

The lean philosophy

Technology-based start-ups usually undertake less long-term planning than firms that
operate in other environments. Yet, they need to be more flexible as they have shorter
life cycles. This context, as previously pointed out, requires entrepreneurs to process
information quickly, make rapid decisions, and act faster than competitors do.
In this setting, it becomes more evident than ever the need for a procedure of
having a flexible, agile and lean process to allow entrepreneurs to meet user require-
ments in a fast and effective way. Literature on manufacturing and supply chain
management has already discussed the key advantages of combining agile and lean
principles to accelerate product development, instead of considering them in isolation
(Naylor et al. 1999; Shah and Ward 2003). Although the terms agile and lean are
sometimes used interchangeably, they actually have different meanings. The agile
methodology consists of iterative and incremental developments where requirements
and solutions evolve, encouraging rapid and flexible responses to change, that
progressively improve the product and reduce the overall cost (Beck et al. 2001).
The lean manufacturing process leverages the learning from short cycles, employing
a regimen of continuous improvement that aims at reducing waste and improving
production rates (Shah and Ward 2003).
Recent developments suggest that these concepts are also being spread to other
disciplines and being increasingly incorporated within the management domain. This
460 Int Entrep Manag J (2012) 8:449–465

is the case of the lean start-up approach. “Lean start-up” is a term used by Ries (2011)
that brings together the principles of customer development, agile methodologies and
lean practices. By using short and frequent cycles for tests and corrections, this
approach aims at changing the way firms are built and products are designed, helping
companies to succeed in a business landscape riddled with risk. Particularly, it seeks
to minimize costs, waste and time to market, giving new products the best possible
chance to get off the ground and into the hands of customers (Gehrich 2012). Even
though the lean start-up approach is still in an embryonic stage, it has attracted much
attention in recent years among entrepreneurs, technologists and investors. Yet, this
research topic certainly constitutes and interesting research stream to better under-
stand the process of starting up a new venture.
According to Ries (2011), the rationale behind the lean start-up approach is to
optimize the utilization of scarce resources by using smaller and faster iterations for
testing a vision continuously so as to get a desired product to customers' hands faster.
To accomplish this goal, lean start-ups strive to minimize the expenditure of resources
for anything but the creation of value for the customer.
Despite fast developments in the high-tech sector and the globalization of markets
have opened tremendous opportunities for technology-based firms, decision-making
in early stages proves to be a challenge (van Riel et al. 2011). To reduce risk involved
in making a large amount of investment for a new venture, Ries (2011) introduced the
notion of the Minimal Viable Product (MVP), a prototype that implements only the
most necessary features of the product to test fundamental business hypotheses and
get customer feedback in early stages. MVP allows entrepreneurs to focus more on
knowing who their customers are, what habits they have, and how to attract and retain
them. Operating this way, start-ups can have early on-going interactions with cus-
tomers, and thus, have a better chance of success without requiring large amounts of
outside funding to launch the product.
Discovery and learning represent the fundamental cornerstones of the lean start-up
philosophy. By way of synthesis, Fig. 3 illustrates the build-measure-learn diagram, a
modernized version of the Plan-Do-Check-Act cycle attributed to Deming in the
1950s. This validated learning circle outlines a series of activities to capture the
customer’s feedback and make decisions about new product functionalities (Gehrich
2012). It begins in the build stage where a set of ideas take shape. Once the prototype
or MVP is built and codified, it is presented to customers. Using different qualitative
and quantitative techniques customer response is measured. The information gathered
may provide specific learning that serves to validate or reject the hypotheses pro-
posed, which in turn initiates the next iteration process.
In Fig. 3, it can be inferred that the central activity of a start-up is to turn ideas into
products, measure customers’ response, and learn whether to pivot or persevere
(http://theleanstartup.com/). Pivot experiments are attempts to validate a part of the
business model and gain valuable new understanding of it. The use of performance
indicators to measure the continuous development process is the core component of
the lean start-up methodology (Maurya 2012). The measures obtained may help
entrepreneurs test hypotheses about the product, strategy, and engine of growth, align
business and product efforts, prioritise objectives, and eventually improve the entre-
preneurial outcomes. Once all the hypotheses are tested and the MVP turns into the
final product, the next step is optimization, striving for efficiency or scale. Aardvark,
Int Entrep Manag J (2012) 8:449–465 461

Fig. 3 Build-learn-measure diagram

DropBox, Grockit, Votizen, and Wealthfront are just a reduced list of successful
technology-based firms that have already begun to employ this philosophy.

Discussion and conclusions

Technological advances and new computing developments have established new

regimes of communication in the knowledge society, transforming the traditional
balance between customers and suppliers. These changes imply managers need to
select alternative strategic responses to technological change, managing how to best
deliver this technology to customers (Jagoda et al. 2010; Schiavone 2011). For this
purpose, a more customer-centred model is needed, requiring businesses to constantly
re-evaluate their value propositions to ensure their offer matches well with customer
demands. Also, this changing environment has intensified the entrepreneur’s need to
update in a simple way any modification in the operation and structure of the venture.
Thus, entrepreneurs need to design flexible business models that enable them to
efficiently re-shape strategic choices that outline the business logic according to
market demands.
According to Casadesús-Masanell and Ricart (2010) and Anthony (2012) firms
can compete through their business models. Business models are powerful tools for
entrepreneurs, either in venture creation or venture change stages. All businesses,
either explicitly or implicitly employ a particular business model (Teece 2010). Yet,
business models represent a unique opportunity to unlock the entrepreneurial process,
evaluate firm configuration effects, and describe and forecast entrepreneurial out-
comes (George and Bock 2011).
This paper has articulated that business models are a central construct in entrepre-
neurship research. Our literature review reveals that although literature is still scarce,
research in business model design within the field of entrepreneurship is acquiring
462 Int Entrep Manag J (2012) 8:449–465

increased attention among academics and managers. It does not only consist of
discovering how to create a more successful business, but in exploring how firms
can better learn from their own experience and improve their entrepreneurial
outcomes.
In this paper we have briefly reviewed four of the main practices that are gaining
popularity in recent years. These emerging trends in business model design highlight
the importance of not only listening to customers but also co-create new values or
products with customers (Lee et al. 2012). It is also important to make better and
faster business decisions regarding operational efficiency and the use of scarce
resources. This is especially true for new technology-based firms, which operate in
a dynamic sector where innovation and speed are key premises. As these firms
confront unique trade-offs that established businesses with deeper resources and
stable life cycle are not likely to face, technology-based ventures should rapidly
create or improve effective solutions that accommodate customer needs.
Open innovation, customer development processes, agile developments or lean
methodologies have ushered in new ways to build products unlike anything we have
ever experienced, facilitating the creation of technology-based firms. In addition, a
new innovation paradigm, “co-innovation,” which incorporates convergence, collab-
oration, and co-creation in the innovation platform, presents a new horizon to
entrepreneurs (Lee et al. 2012). All these approaches converge in the use of quick
iterations and train scheduling to build new features and products. This trial-error
philosophy for validating the hypotheses of the business model and the appropriate-
ness of the product/service offered is what really makes these practices so valuable.
Indeed, this logic boosts innovation and fosters the creation of products in a much
faster time span, helping entrepreneurs to start a venture with greater assurance of
success.
Our aim in this paper has been to open new pathways for future research on
business models and entrepreneurship. From here, several research questions appear
to be of great interest in this respect: Is there any connection between firm perfor-
mance and how the business model is designed? Does an accurate business modelling
design process make a new venture more robust or more successful? How start-ups,
from their early stages of the life cycle, can have a greater impact in the marketplace?
How new technology-based firms can improve the fit between their value proposition
and customer demands? Based on these queries, future research efforts should be
directed to empirically test the potential connections between business model design,
business strategy and firm performance.

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